Monthly Archives: June 2015

We are living in a formal European governance system, which has lost the essential function of a political system, which is providing the public good. The buzzwords with which the current euro-crisis is negotiated are: governance, federation, integration, structural reforms, growth, competitiveness, subsidiarity. None of these words is clear; none of these words is warm; none of these words contains any normative grounding; none of these words creates a vision for Europe or unites its citizens behind a common good and a common goal, as they are all formal organisational principles.

Following the Argentinean example, thousands more are also involved in Greece’s barter network, in which those without sufficient Euros due to loss of work or financial hardship exchange basics like clothes and food or services such as English lessons, massages or haircuts by using the TEM credits system. On Sunday the ECB announced that it would refuse to further capitalise the Greek banks which means that they will literally run out of money very soon. In a post-default scenario a desperate population will resort to joining barter clubs on a massive scale, as 2.5 million Argentineans did in 2002 when liquidity ran dry. These would act as another safety valve against neoliberalism’s devastating consequences.

According to Jorge Rabey, coordinator of a barter club in the Argentinean city of Santa Fe in 2002, “in my city alone, the clubs were used by 4,000 families. Ultimately barter acted as a barrier to poverty and as a form of containment. Santa Fe enjoyed lower levels of violence and social problems during the crisis as the community came together to ensure that basic needs were satisfied.” He adds that “the corporate media and ruling elites were favourable to us in the early days because they were well aware that barter was helping the system to save itself and preserve social order.”

We are living in a formal European governance system, which has lost the essential function of a political system, which is providing the public good. The buzzwords with which the current euro-crisis is negotiated are: governance, federation, integration, structural reforms, growth, competitiveness, subsidiarity. None of these words is clear; none of these words is warm; none of these words contains any normative grounding; none of these words creates a vision for Europe or unites its citizens behind a common good and a common goal, as they are all formal organisational principles.

Secondly the ECB is about to undertake €60bn of QE every month starting ‘no later than March 5’. What that means is that the overall system will become short of income earning assets as government bonds are drained by the central banks. Greece may be excluded directly from this process for the time being, but importantly it is the only government in the Eurozone that is on an expansion footing. Everybody else is busily digging their own graves by reducing deficits and other such nonsense and so is issuing as little as possible.

So that leaves new Greek government bonds as pretty much the sole source of anything resembling an interest rate in the whole Eurozone. It will be a very interesting test of ‘liquidity preference’ to see whether all this money that costs banks money to hold on deposit will stay there or whether they will be tempted by the Greek offering.

In other words it ain’t over until the Fat Lady fails to show up at the bond auction.

The problem though is that, may we say naturally, because of conflicts of interest, too many in Europe, like government employees and/or statist ideologues, are too interested in keeping the flow of these easy credits going. In other words, too many have found redistribution and cleaning up debris after the storm to be a politically more rewarding activity than producing or building more storm resistant houses… and this guarantees the continuance of Europe’s “deeply flawed governance”.

Secondly, allowing banks to hold less equity against the borrowings of “the safe”, than against the borrowing of “the risky”, signifies a subsidy to those who already have more and cheaper access to credit, and a regulatory tax on those who already have less and more expensive access to bank credit. And this translates into an odious and dangerous distortion of the allocation of bank credit to real economy, and which also, by negating opportunities to those most in need of it, is an important driver of inequality. Not wanting to understand this could be explained in terms of intellectual and moral procrastination… and in Europe, I am sad to say to many seem to be engaged in that.

Those are the basics all Wise Folk agree on. Then those on the right go on to say feckless Greece must either accept Europe’s deal or get out of the single currency. Or if more liberal, they hem and haw, cough and splutter, before calling for Europe to show a little more charity to its southern basketcase. Whatever their solution, the Wise Folk agree on the problem: it’s not Brussels that’s at fault, it’s Athens. Oh, those turbulent Greeks! That’s the attitude you smell when the IMF’s Christine Lagarde decries the Syriza government for not being “adult” enough. That’s what licenses the German press to portray Greece’s finance minister, Yanis Varoufakis, as needing “psychiatric help”.

There’s just one problem with this story: like most morality tales, it shatters upon contact with hard reality. Athens is merely the worst outbreak of a much bigger disease within the euro project. Because the single currency isn’t working for ordinary Europeans, from the Ruhr valley to Rome.

lecture at the Duisenberg School of Finance focused on the peculiar failure of economic theory to appreciate the role of private debt in causing the economic crisis, and the possible future we face now that private debt is rising once more after only a minor level of deleveraging from the highest level of aggregate private debt in human history.

This is where Greek deception gives way to German myth—laced with elements of both tragedy and farce. Schäuble’s remedy of Greece’s malaise could hypothetically work if the rebuilding of the trust that investors had in Greece before the crisis could return, and reduce rates to the 5% level they were before the crisis—if not to parity with current German rates, which are effectively zero. But that is patently not feasible when Greece’s government debt ratio has risen from under 120% before the crisis to over 170% now.

Rates on Greek bonds had fallen from almost 30% in 2012 to 6% in mid-2014, but blew out to 7.5% even before the Greek election was called, and when the Troika’s austerity program was being imposed by the pre-Syriza government. At its minimum—before Syriza became a factor—servicing Greek government debt required 12% of Greek’s GDP (see Figure 3). Total government spending in most OECD economies is only two to three times this amount. No OECD government could survive having to spend 33-50% of government revenue on interest payments alone; how then could Greece, with its rampant tax evasion, ever hope to service this amount?

In his book Governing by Debt, Maurizio Lazzarato argues that the creditor-debtor centred politics of contemporary capitalism is substantially different from the capital-labour centred politics of post-war capitalism. In fact, to understand what is at stake in contemporary Europe we need to approach debt in its totality – government, corporate, financial and household debt. We have to recognise that the debt relationship is not merely an economic relationship of money owed and collected, but a deeply political relationship of power exercised by one person or institution over another.

life assurers were investing like banks, and their experiment was not far off what today would be called direct lending.

Then as now low yields on government bonds pushed investors with long-term liabilities to look for returns in recherché forms of credit where they would not mind the lack of liquidity. It included private corporate debt. Over the years this market became much bigger in the US.

In Europe, where banks have historically financed almost all corporate investment, it did not. That is changing.

A private debt market is maturing in the region, fed by a continuing retreat by banks from loans to small and middle-market companies, under the pressure of tougher capital rules. Regulators are catching up.

s the crunch approaches the atmosphere has changed. For six months the centre right in Greece was prepared to wait and let Alexis Tsipras try – and fail – to secure a letup on austerity. Now the old political establishment has understood he intends to take this to the bitter end: a default on Greece’s June payment to the IMF, with possible dire consequences for the banks as early as Monday night.

The ECB’s life support facility – known as Emergency Lending Assistance (ELA) – is conditional on Greece being “in a programme” agreed with lenders. I understand on Friday it was only the intervention of Mario Draghi, the ECB’s boss, that prevented the termination of ELA.

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (Exhibit 1). That poses new risks to financial stability and may undermine global economic growth.

An open letter written last fall by a group of academics proposed a simple securitization structure of the eurozone sovereign debt. At the time it did not get a great deal of traction, but as ESM comes online, it’s an idea worth some consideration.

First of all the group points out the interconnectedness of sovereign credit and bank credit in Europe. Since the European credit markets are dominated by loans as opposed to the US where corporate bond markets are well developed, tight credit conditions in the banking system can have enormous implications for economic growth in the eurozone. At the same time banks hold tremendous amounts of sovereign bonds as well as each others’ debt. This tight feedback loop between governments and banks creates a potential for rapid crisis escalation.